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South African central bank cuts lending rate by 50 basis points

Commercial buildings and office property stand on the city skyline as night falls, as seen from the 50th floor of the Carlton Centre, in Johannesburg, South Africa, on Tuesday, July 17, 2018.

Waldo Swiegers | Bloomberg via Getty Images

South Africa’s central bank cut rates for a fourth time this year to a record low on Thursday, boosting support for an economy strangled by an eight-week-old lockdown aimed at reining in the coronavirus.

While the move helped send the rand to a two-month high, the bank was cautious, warning about borrowing pressures and the need for faster economic reform.

“A narrowing yield differential would normally see the rand weaken. But these are extraordinary times, and markets see the bank as doing everything it can to support the economy,” said Quinten Bertenshaw of ETM Analytics.

The South African Reserve Bank (SARB) cut its main lending rate by 50 basis points to 3.75%, a move that will help consumers and businesses, and predicted a 7% economic contraction this year.

“Easing of the lockdown will support growth in the near term and some high-frequency activity indicators show a pickup in spending from extremely low levels. However, getting back to pre-pandemic activity levels will take time,” Governor Lesetja Kganyago said.

The bank’s monetary policy committee was split 3-2 between a 50 basis point and a 25 basis point cut.

“We believe the current and future environment, combined with the SARB’s rhetoric and gradual adjustment, leaves the door open for another cut, that we currently estimate in a final 50 bps of easing in the July meeting,” said Cristian Maggio, head of EM strategy at TD Securities.

The bank has been under pressure to do more to support the economy beyond rate cuts – now amounting to 275 bps this year. In March it began it began buying government bonds in the secondary market, but some politicians want it to fund government directly.

Kganyago noted the “financing risk” faced by government but said: “Monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks.”

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